According to a recent survey from the Bank of Montreal (http://newsroom.bmo.com/press-releases/bmo-annual-tfsa-report-tfsa-adoption-among-canadi-tsx-bmo-201312190918655001) most people still don’t have a Tax Free Savings Account (TFSA), although nearly twice as many people in 2013 had one than in 2012.
TFSAs are AWESOME
I like TFSAs much better than Registered Retirement Savings Plans (RRSPs). Why? Like a RRSP they grow tax free, but instead of getting the tax credit up front you get it at the end. Since most people I know don’t reinvest their “tax refund” from their RRSP, back into their RRSP dollar for dollar, you are better off investing in a TFSA. You pay NO TAX on anything you withdraw from you TFSA. All withdraws from an RRSP – principle and growth, is taxed (and counted) as income. Income is taxed at double the rate of capital gains. Withdraws/income from your RRSP also take away from Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits. Double whammy! Ouch!
As of January 1, 2014 you can contribute $31,000 (total) to your TFSA. Interest, dividends, capital gains, do not count as contributions.
When you are in a low tax bracket (students, part-time workers, starting a new career, etc.) TFSA are better. In an RRSP the tax deferred (though commonly referred to as a “refund”) is relatively small and is typically taxed later at a much higher rate, again on everything, when you need the money later in life.
TFSAs give you the flexibility to withdrawal as much money out of your account, whenever you want, without penalty, but you have to wait to the next calendar year to replace the contributions if your TFSA is maxed out. If you still have contribution space (i.e. you had space before your withdrawal) you can still add to your TFSA in same calendar year. How is that for a rainy day fund?
When you are in a high tax bracket fill your TFSA first, then your RRSP. RRSPs are still great savings vehicles.
Ready to contribute to your TFSA but not sure what to put inside?
A TFSA is similar to an RRSP. You can hold: cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates, bonds and certain shares of small business corporations. Personally I like dividend paying stocks, but if you are uncomfortable trading stocks you can choose an Exchange Traded Fund (ETF), or a low fee mutual fund. It is worth your time to check this out. Unless you are close to retirement, don’t put your money in a Guaranteed Investment Certificate (GIC) or “high interest savings account” you won’t even keep up with inflation. Also, since TFSAs are not recognized by US-Canadian tax treaties, it is better to hold US listed stocks and ETFs in your RRSP if you can.
It may be true that nothing in life is certain except for death and taxes. At least with a TFSA you can minimize the taxes…
Be happy, live long and prosper!
engineering wealth 
“In an RRSP the tax deferred (though commonly referred to as a “refund”) is relatively small and is typically taxed later at a much higher rate” I like the way you explained that, it helped me clarify how to model and contrast the two. I wonder $10K, invested equally, how would it turn out (assuming the same investment gains) for someone who earns an average of $50K a year for their career, and for $100K a year… would the choice between RRSP and TFSA be different? Without having done the math yet, I’d guess TFSA and RRSP respectively, but I’m prepared to be surprised. 🙂
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Reblogged this on Searching for a Unifying Theme and commented:
A great perspective from my buddy JJ on TFSA vs. RRSP which has me re-thinking my strategy.
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